Danaher Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended July 1, 2011; comparisons are to periods ended July 2, 2010. Financial statements are unaudited. Danaher operates across Test & Measurement, Environmental, Life Sciences & Diagnostics, Dental, and Industrial Technologies.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Sales | $3.712bn | $3.217bn | $7.057bn | $6.225bn |
| Gross profit | $1.943bn | $1.606bn | $3.707bn | $3.074bn |
| Operating profit | $626.1m | $517.8m | $1.217bn | $939.3m |
| Continuing-operations earnings | $449.6m | $362.1m | $869.9m | $654.9m |
| Net earnings, including discontinued operations | $648.8m | $372.5m | $1.078bn | $672.7m |
| Diluted EPS, continuing operations | $0.65 | $0.53 | $1.26 | $0.97 |
| Diluted net EPS | $0.94 | $0.55 | $1.56 | $1.00 |
- Q2 sales rose 15.5%; management attributed 7.5 percentage points to existing businesses, 5.0 points to currency, and a net 3.0 points to acquisitions after the Apex joint-venture comparison. First-half sales rose 13.5%, with 8.5 points from existing businesses, 3.5 from currency, and a net 1.5 from acquisitions.
- Gross margin was 52.4% in Q2 versus 49.9%; first-half gross margin was 52.5% versus 49.4%. Operating margin was 16.9% versus 16.1% in Q2 and 17.2% versus 15.1% for the first half.
- Operating cash flow from continuing operations was $1.157bn for the first half, up from $916.2m. Total operating cash flow, including discontinued operations, was $1.099bn. Capital expenditures were $108.1m; net cash used in investing was $5.482bn, primarily reflecting acquisitions.
- Cash and equivalents were $551.6m at July 1, down from $1.633bn at year-end 2010; approximately $535m was held outside the United States. Debt was $6.573bn in total, including $47.9m current and $6.525bn long-term, versus $2.825bn total at year-end. Approximate net debt was $6.021bn, calculated as debt less cash.
- At July 1, commercial paper outstanding was $630.7m, with a 0.2% weighted-average rate and approximately 15-day average maturity. Danaher reported compliance with debt covenants and no borrowings outstanding under its revolving credit facilities at that date.
Material changes and unusual items
- Danaher completed its $5.5bn cash acquisition of Beckman Coulter on June 30, 2011, acquired approximately $450m of cash, and assumed approximately $1.6bn of debt. Beckman’s results were included from June 25. The acquisition added approximately $3.68bn of preliminary goodwill and $2.75bn of acquired intangible assets; purchase-price allocations remained preliminary.
- Danaher funded the Beckman acquisition with cash, approximately $966m net proceeds from a common-stock offering, approximately $1.79bn net proceeds from senior-note offerings, and commercial paper. The stock offering issued 19.25m shares. It also acquired four other businesses for $520.5m net cash consideration.
- In April, Danaher sold Pacific Scientific Aerospace for $680m cash. The sale produced an after-tax gain of $201.7m, or approximately $0.29 per diluted share, included in discontinued operations. That gain substantially increased reported net earnings; continuing-operations earnings provide a clearer view of ongoing results.
- Beckman-related transaction, change-in-control, and fair-value adjustment charges reduced Q2 operating margin comparisons. Management said Beckman acquisition effects would weigh on Q3 earnings and segment margins, especially through inventory and deferred-revenue fair-value charges, with a more favorable earnings impact expected in Q4.
- Danaher expected to retire Beckman’s senior notes and all or substantially all of its convertible notes in Q3 using commercial paper. It anticipated an approximately $20m earnings charge from make-whole provisions on the senior notes.
Outlook, commentary, and risks
- Management expected sales to continue growing in the remainder of 2011, provided there was no significant deterioration in economic conditions. Q2 growth was led geographically by China and other emerging markets, then North America. No specific full-year revenue or EPS guidance was provided.
- Management expected second-half gross margins to contract versus the first half, reflecting Beckman’s lower overall gross margins and acquisition-related fair-value charges. Industrial Technologies’ motion-business growth was expected to moderate from first-half rates.
- Management cited higher volumes and productivity improvements as key margin benefits, partly offset by investments in sales, marketing, and product development. Currency translation increased reported sales; the filing cautioned that exchange-rate movements could also reduce them.
- Beckman acquisition risks include integration and execution challenges, failure to achieve expected synergies, assumed or unanticipated liabilities, leverage, and possible impairment of significant goodwill and intangible assets.
- Regulatory matters are notable: Beckman was working to obtain updated FDA 510(k) clearances for certain troponin test kits and reviewing other product modifications and quality-system issues. FDA inspections of five facilities generated Form 483 observations; the company reported responses and corrective-action work. Delays, restrictions, enforcement, or lost sales remain possible.
- Other disclosed risks include economic and market cyclicality, competition, foreign exchange, healthcare reimbursement and regulatory changes, litigation, product quality, supply constraints, pension funding, and indebtedness. Danaher said disclosure controls were effective; integration of Beckman’s controls was ongoing.
Important facts for investors to verify
- Whether Beckman integration delivers the cost synergies and earnings contribution anticipated, and how Q3 fair-value charges compare with management’s expectations.
- Progress and outcomes of FDA clearance, product-modification reviews, inspection observations, and quality-system corrective actions at Beckman.
- Post-acquisition debt levels, commercial-paper dependence, repayment of Beckman obligations, interest expense, and compliance with credit-facility covenants.
- Underlying sales and margin trends by segment, separating existing-business growth from acquisition and currency effects and accounting for the Apex joint-venture change.
- Goodwill and acquired-intangible valuations, which remained preliminary, and any subsequent purchase-accounting adjustments or impairment indicators.